Oil-for-aid rollover just delaying inevitable over Iraqi oil supply disruption

The United Nations Security Council's approval to extend the Iraqi oil-for-aid program for another 6 months would, at first glance, seem to deflate the oil market expectations outlined in this space last week.

Instead, it really is just delaying the inevitable day of reckoning when Iraqi oil supply prospects collide with the geopolitical and military objectives of the US-led coalition in the war on terrorism. Discovery of any "smoking gun" involving Iraqi complicity in terrorist acts or continued work on prohibited weapons manufacture would accelerate that day of reckoning sharply.

US-Russian deal?
The latest rollover of the oil-for-aid sales program was engineered jointly by the US and Russia via a compromise that has been hailed as further evidence of growing cooperation between Washington and Moscow since Sept. 11.

The compromise has its roots in a longstanding dispute between Russia and the US over the UN sanctions against Iraq. The latest flare-up in that dispute occurred this past spring when the program was again up for a 6-month renewal. The US and UK had sought to reform the sanctions program at that time to allow greater flow of civilian goods into Iraq but at the same time clamp down on Iraqi imports of goods with potential militiary applications and resume UN inspections of Iraqi arms programs. Russia's threatened veto at the time caused that plan to be shelved.

Under the compromise, Russia agreed to approve by May 30 a new list of goods requiring UN review before Iraq can import them. The US, meanwhile, has agreed to Russia's oft-repeated call for a comprehensive settlement of sanctions issues that would set the stage for ultimately lifting the military embargo on Iraq. What is specifically requested here is a need to clarify just what steps Iraq must take in order to have the sanctions lifted.

At least one self-styled oil market expert-whose background is anesthesiology and a propensity for picking oil company stocks-has jumped to the conclusion that this compromise represents the beginnings of a "new world order" in oil markets, in which Russia is positioning itself and the other former Soviet republics as a reliable alternative to OPEC oil supplies. This stock-picker goes so far as to suggest that part of the compromise includes the US softening its position on Iraq. By implication, this would also suggest that Russia's recent defiance of OPEC is part of the "deal," i.e., a tradeoff on the US easing its stance on Iraqi sanctions in exchange for a low oil price regime that could jump-start the US economy.

If that latter view were true, it would accelerate the revival of Iraq's oil sector much faster than anyone had expected and represent a long-term depressant on oil prices.

That's a massive if.
First, it is unthinkable that-the potential for political suicide aside-President George W. Bush would abdicate a personal moral responsibility to allow Iraqi sanctions to be lifted without a return of UN weapons inspectors to Iraq. The Bush administration has repeatedly cited Iraq as a chief sponsor of terrorism in the world, and it is no secret that Iraq remains in the US crosshairs in the war on terrorism-especially with the mounting evidence of Iraq's ties to Osama bin Laden's terrorist network and intelligence reports suggesting that Baghdad has continued work on weapons of mass destruction despite the sanctions. To suddenly reverse himself on Iraq merely for the sake securing low oil prices for the US would represent a geopolitical obtuseness and pandering appeasement of a scope to make Neville Chamberlain at Munich seem positively Churchillian. It just doesn't wash.

It isn't cynical to suggest that the compromise does represent a mutual accord by the US and Russia to postpone the possibility of an Iraqi oil supply disruption until second half 2002, when by many accounts the world economy is expected to begin its recovery. It is an unfathomable leap from there to suggest the Bush administration would overlook the continuing threat Saddam Hussein poses to the world, and the US in particular, for the sake of joining with Russia to undermine OPEC.

The same cooler heads that prevailed when the Wolfowitz camp in the Bush administration wanted to take the antiterrorism campaign to Baghdad while simultaneously waging war in Afghanistan have have likely fashioned this delay game as well.

The real question for now is how long both Russia and Saudi Arabia want to play their own delay game in working up production cuts to keep oil prices out of the cellar. The betting here is that the Russians likely will blink sooner rather than later and together with the Saudis implement some face-saving compromise that will still leave markets a bit oversupplied but not falling off a cliff because of the winter demand pickup.

The real question for a little later is what happens after Osama bin Laden and other key figures of the Al-Qaeda terrorist network have been brought to justice (which, in this corner, means killed). Perhaps after the first of the year, if that richly deserved end has come about, the Bush administration will deem it necessary to unveil the information it likely is harboring for now regarding Iraq and terrorism. When the elements of a Phase 2 in the war on terrorism begin to gel and that puts Iraq in the US sights again, the status of an oil-for-aid program will be moot.

Even if that takes much longer, by the time the sanctions program comes under review again, the US will not-cannot-change its stance on Iraqi sanctions and weapons inspections. Together with the likelihood that the US antiterrorist campaign will focus, at least rhetorically if not in action, increasingly on Baghdad, there still remains a better than 50-50 chance that Iraq's (legal) oil supplies will come off the market before second half 2002.

Rest assured that the Bush administration will provide the "clarification" Russia seeks on what it would take to get Iraqi sanctions lifted. And Iraq won't like what is clarified one bit. Furthermore, Russia recognizes the need for a weapons inspection regime too.

If there remains some question over a US-Russia deal that would allow an eventual lifting of sanctions on Iraq without a weapons inspection regime, consider this quote, courtesy of the Associated Press, from Russia's UN ambassador, Sergey Levrov:

"The only way to radically solve the Iraqi problem is to ensure that international disarmament monitoring resumes in Iraq in conjunction with the suspension and lifting of sanctions, and the only way to achieve this is to eliminate ambiguities which exist in the [1999 UN] resolution [to ease sanctions in return for Baghad's cooperation with weapons inspectors."

That statement could allow the Russians some rhetorical wiggle room later as what timing is implied by the phrase "in conjunction."

But there is no wiggle room in President Bush's own rhetoric on the issue. Only this week, he demanded that Iraq must allow UN weapons inspectors to return or "face the consequences."

With our country at war in a conflict likely to spread, how could we believe otherwise?

OGJ Hotline Market Pulse
Latest Prices as of Nov. 30, 2001

Click here to enlarge image

null

Click here to enlarge image

null

Nymex unleaded

Click here to enlarge image

null

Nymex heating oil

Click here to enlarge image

null

IPE gas oil

Click here to enlarge image

null

Nymex natural gas

Click here to enlarge image

null

Related Articles

TAEP: TPI still peaking, but ‘contraction unavoidable’ as oil prices fall

12/12/2014 The Texas Petro Index (TPI), a composite index based on a comprehensive group of upstream economic indicators released by the Texas Alliance of Ene...

MARKET WATCH: NYMEX crude oil price extends slump

12/12/2014 Crude oil prices extended their slump on the New York market with a Dec. 11 settlement of less than $60/bbl for January, and prices continued downw...

US needs more data before ending crude export ban, House panel told

12/11/2014 Much more environmental impact information is needed before the US can reasonably remove crude oil export limits, a witness told a House Energy and...

Rosneft, Essar sign terms of oil supply agreement

12/11/2014 OAO Rosneft and Essar Energy PLC have signed key terms of an oil supply agreement in New Delhi. Rosneft said shipments to India may begin in 2015.

Barton introduces bill to remove US crude export limits

12/11/2014

US Rep. Joe Barton (R-Tex.) introduced legislation that would remove US crude oil export limits that have been in place for nearly 40 years.

MARKET WATCH: NYMEX crude oil price slides below $61/bbl

12/11/2014 Crude oil prices fell below $61/bbl for January delivery on the New York market Dec. 10 after the Organization of Petroleum Exporting Countries low...

MARKET WATCH: US crude oil prices rebound modestly awaiting inventory report

12/10/2014 Crude oil prices rose modestly on the New York market Dec. 9 while analysts awaited the US government weekly inventory report on crude oil and prod...

ExxonMobil forecasts 35% higher world energy demand by 2040

12/10/2014 A significantly bigger global middle class, expanded emerging economies, and 2 billion more people will contribute to 35% higher world energy deman...

MARKET WATCH: Crude oil prices briefly dip to 5-year lows

12/09/2014 Oil prices on the New York and London markets remained volatile, briefly trading around lows not seen since 2009 although prices were attempting to...

White Papers

What is System Level Thermo-Fluid Analysis?

This paper will explain some of the fundamentals of System Level Thermo-Fluid Analysis and demonstrate...

Accurate Thermo-Fluid Simulation in Real Time Environments

The crux of any task undertaken in System Level Thermo-Fluid Analysis is striking a balance between ti...

6 ways for Energy, Chemical and Oil and Gas Companies to Avert the Impending Workforce Crisis

As many as half of the skilled workers in energy, chemical and oil & gas industries are quickly he...
Sponsored by

AVEVA NET Accesses and Manages the Digital Asset

Global demand for new process plants, power plants and infrastructure is increasing steadily with the ...
Sponsored by

AVEVA’s Approach for the Digital Asset

To meet the requirements for leaner project execution and more efficient operations while transferring...
Sponsored by

Diversification - the technology aspects

In tough times, businesses seek to diversify into adjacent markets or to apply their skills and resour...
Sponsored by

Engineering & Design for Lean Construction

Modern marketing rhetoric claims that, in order to cut out expensive costs and reduce risks during the...
Sponsored by

Object Lessons - Why control of engineering design at the object level is essential for efficient project execution

Whatever the task, there is usually only one way to do it right and many more to do it wrong. In the c...
Sponsored by

Available Webcasts



The Future of US Refining

When Fri, Feb 6, 2015

Oil & Gas Journal’s Feb. 6, 2015, webcast will focus on the future of US refining as various forces this year conspire to pull the industry in different directions. Lower oil prices generally reduce feedstock costs, but they have also lowered refiners’ returns, as 2015 begins with refined products priced at lows not seen in years. If lower per-barrel crude prices dampen production of lighter crudes among shale plays, what will happen to refiners’ plans to export more barrels of lighter crudes? And as always, refiners will be affected by government regulations, particularly those that suppress demand, increase costs, or limit access to markets or supply.

register:WEBCAST


Oil & Gas Journal’s Forecast & Review/Worldwide Pipeline Construction 2015

When Fri, Jan 30, 2015

The  Forecast & Review/Worldwide Pipeline Construction 2015 Webcast will address Oil & Gas Journal’s outlooks for the oil market and pipeline construction in a year of turbulence. Based on two annual special reports, the webcast will be presented by OGJ Editor Bob Tippee and OGJ Managing Editor-Technology Chris Smith.
The Forecast & Review portion of the webcast will identify forces underlying the collapse in crude oil prices and assess prospects for changes essential to recovery—all in the context of geopolitical pressures buffeting the market.

register:WEBCAST



On Demand

Optimizing your asset management practices to mitigate the effects of a down market

Thu, Dec 11, 2014

The oil and gas market is in constant flux, and as the price of BOE (Barrel of Oil Equivalent) goes down it is increasingly important to optimize your asset management strategy to stay afloat.  Attend this webinar to learn how developing a solid asset management plan can help your company mitigate costs in any market.

register:WEBCAST


Parylene Conformal Coatings for the Oil & Gas Industry

Thu, Nov 20, 2014

In this concise 30-minute webinar, participants have an opportunity to learn more about how Parylene coatings are applied, their features, and the value they add to devices and components.

register:WEBCAST


Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!

 

Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected